Not-for-Profit Reporting Series: Improvements for Net Asset Classifications

The Financial Accounting Standards Board (FASB) released a historic update in August that improves the reporting standards for not-for-profit entities.

Called Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, this update enables not-for-profits to better tell their financial story, to make the financial statements more useful to readers, and to provide more consistency in reporting between organizations.

Although it won’t take effect until fiscal years beginning after December 15, 2017, early adoption is permitted, so it’s best to assess whether your organization can benefit from applying it now. We’ll give an in-depth overview of the changes required in a series of articles on the new standard. The first article gives a snapshot of how things will change for not-for-profits as a result of these sweeping changes.

In this article, we focus on one of the most significant changes to arise from the standard: net asset reporting requirements. These new requirements enhance the usefulness of information not-for-profits provide donors, grantors, creditors, and others in the presentation of financial statements and notes.

The Current Standard

Not-for-profits will continue to report net assets under the FASB Accounting Standards Codification® (ASC) Topic 958, Not-for-Profit Entities. Its three classification categories currently are:

  • Temporarily restricted net assets. These have donor-imposed restrictions either based on the passage of time or the fulfillment of a specified purpose.
  • Permanently restricted net assets. These have donor-imposed restrictions stipulating resources be maintained permanently and may permit the not-for-profit to use or expend part or all of the income or economic benefits derived from the donated assets.
  • Unrestricted net assets. These are neither permanently nor temporarily restricted by donor-imposed stipulations. Their only limits come from the nature of the not-for-profit, its operational environment, the purpose specified by incorporation or bylaw articles, or contractual agreements with suppliers, creditors, or others. Board-designated reserves are considered unrestricted net assets.

What the Standard Changes

The new standard addresses complexities in net asset reporting requirements under ASC 958-205 by collapsing net asset classification down from the three categories above into two. The new categories include:

  • Without donor restrictions. These represent net assets that are not subject to donor restrictions, as well as voluntary reserves such as separate components of board-designated net assets.
  • With donor restrictions. These represent net assets with donor restrictions, including underwater endowments.

In addition to these new categories, the standard adds disclosure requirements for board-designated net assets and for underwater endowment funds.

For all underwater endowment funds in particular, the not-for-profit is required to disclose the following in aggregate:

  • Fair value of the funds
  • Original endowment gift amount or level that’s required to be maintained either by donor stipulations or by law
  • Deficiency amount of the fund, which is the first bullet point minus the second

Information on the nature of the restrictions will continue to be disclosed, primarily based on time expirations, purpose fulfillment, or net assets held to perpetuity.

When to Implement the Standard

As previously mentioned, early adoption is permitted before the standard’s effective date of fiscal years beginning after December 15, 2017. It will also become effective for interim periods within fiscal years beginning after December 15, 2018.

Not-for-profits should retrospectively update their financial statements. In addition to the net asset categories discussed above, a not-for-profit must disclose any reclassifications and restatements made as a result of adopting the new guidance and their effects on the changes in net asset classes for each year that’s presented. This disclosure only needs to be made in the period the amendments are first adopted.

However, when presenting comparative financial statements, not-for-profits can elect to omit certain information for periods before the year of adoption. That includes analysis of expenses by both functional and natural classifications, as well as disclosures about liquidity and availability of resources.

We're Here to Help

Not-for-profits can prepare for this change by having preliminary discussions on how to best tell the organization’s story. Those who elect not to adopt early should consider various illustrative examples the not-for-profit may use to update their presentation instead. It’s best to take the time now to speak with those responsible for governance, such as the organization’s board of directors, to determine the optimal presentation of the not-for-profit’s financial statements. Engaging with an advisor who understands the new ASU can facilitate these conversations and enhance your awareness of the intricacies of the new requirements.

Moss Adams will continue to provide insight and implementation suggestions through a series of articles on this new standard. To learn more about the new standard, or to gain a better understanding of the specific changes coming for not-for-profit financial statement requirements in general, contact your Moss Adams not-for-profit professional.